Prudential Financial (NYSE:PRU) reported a net loss of $214 million for the fourth quarter of 2012, influenced primarily by net realized investment losses of $1.7 billion. The weakening of the Yen in the fourth quarter led to losses of $1.5 billion due to asset and liability changes. Revenues were helped by a pension risk transfer transactions with General Motors (NYSE:GM) and Verizon (NYSE:VZ), which accounted for $33.6 billion of the total $43.1 billion retirement sales and deposits for the quarter. Net revenues for the quarter were $46 billion up from $10 billion in the fourth quarter of 2011.
Our price estimate of $56 for Prudential’s stock implies a premium of nearly 10% to the current market price.
The aforementioned GM and Verizon agreements allowed the total group annuity account values to surpass the $60 billion level at the end of the year and also added 150,000 retiree accounts to Prudential’s coverage. The increase in premiums was offset by a subsequent increase in insurance and annuity benefits expenses, which totaled $32 billion while the net investment income remained in line with the figure for 2011. The retirement division was helped by a benefit of $78 million from settlement of losses recorded in 2007, excluding this one time gain, the adjusted operating income for the retirement division was $147 million in line with the operating income of $140 million reported for the fourth quarter of 2011.
Excluding the group pension transfer deals, the gross sales and deposits for the retirement division were down 35% from the prior year due to lower sales of stable value wrap products. According to our estimates, the full year operating margin for the U.S. retirement solutions division dropped from 17% in 2011 to 4% as the net investment income did not match the growth in premiums and expenses. Investment income accounts for 10% of the division’s revenue but is required to maintain profitability as net benefits and expenses are usually more than income from premiums and policy fees. We believe that Prudential will see a drop in margins in the next few years as income from investment will be suppressed by low interest rates. Around 75% of Prudential’s investment income is earned from fixed maturities like government bonds, which are influenced by the level interest rates.
International Growth Continues
Prudential reported a 32% increase in international insurance sales driven by a ten-fold increase in single premium yen-based whole life bank channel product sales. This increase was primarily because several competitors in the Japanese market cut back on sales of similar products in 2012. Prudential has completed the integration of Star Life Insurance Co., Ltd. and Edison Life Insurance Company acquired from AIG (NYSE:AIG) in 2011, into its Gibraltar Life. Excluding integration costs, the adjusted quarterly operating income for the division increased by 10% over the prior year. We believe Prudential is in a prime position to capitalize on growth in developing markets of Asia. Please read our article, Prudential To Expand Its Asian Reach With Japan As The Fulcrum for more details.
The individual life insurance division was affected by a $15 million charge related to the acquisition of The Hartford Financial Services Group’s (NYSE:HIG) individual life insurance business. Excluding this one time charge, the division reported a 17% year-on-year decline in operating income for the quarter despite a 200% increase in universal life product sales. This decline was driven by higher expenses, including higher non-deferrable costs associated with higher sales in the quarter.
The reinsurance deal with Hartford involved the transfer of 700,000 life policies and investment assets with a statutory book value of around $7 billion reserved for future claims on these policies and will help Prudential gain market share in the U.S. in the coming years.